FERC Chairman James Hoecker said recently he didn’t expect tosee much “consensus” from the natural gas industry on the majorinitiatives in the notice of proposed rulemaking (NOPR) and noticeof inquiry (NOI). Judging from some of the comments that floodedinto the Commission yesterday, he was right on target.

This lack of harmony was apparent in the comments of the NaturalGas Supply Association (NGSA), the American Gas Association (AGA)and the American Public Gas Association (APGA)- the only majorgas trade groups that had their NOPR and NOI comments available atpress time [RM98-10, RM98-12].

In a nutshell, the AGA, a major LDC group, was the only one ofthe three that favored giving interstate pipelines the authority tonegotiate terms and conditions of service, while the NGSA – whichrepresents producers – stood alone in its support of auctioning ofshort-term capacity in the event the price caps on the capacity arelifted. AGA was the lone proponent of lifting the price cap oncapacity-release transactions, which – together with short-termfirm and interruptible – make up the short-term capacity market.

The natural gas LDCs conditioned their support for negotiatedauthority for pipelines on the availability of a “high-qualityrecourse service” and the implementation of the Commission’sexpedited complaint rule. The recourse service/rate must”appropriately reflect cost reductions” and protect recourseshippers from “subsidizing the market-responsive services offeredunder negotiated rate policies.”

Producers, however, were dead set against awarding suchauthority to pipelines – unless a showing is made that theshort-term market is sufficiently competitive. They insist thenegotiation of terms and conditions “will inevitably result inpreferential contracts, especially for contracts between thepipelines and their affiliates, whether they be in the business ofproducing, processing, gathering, marketing, distribution of gas orthe generation of electricity.”

The APGA municipal distributors agreed, saying negotiated termsand conditions would be “nothing less than Commission approval ofunduly discriminatory and preferential transportation services,”and would be “inimical to all major regulatory reforms embraced bythe Commission in the last decade.”

The group contends that empowering pipelines with negotiatedauthority “is fundamentally a zero sum game that can only adverselyaffect captive customers,” such as municipal distributors.Moreover, the APGA insists such authority would “unfairly” devaluetheir released capacity by “slant[ing] the playing field in favor”of interstate pipelines selling capacity. “The pipeline can, if itchooses, sell premium capacity at the same price that the captivecustomer can sell its inferior tariff capacity.”

If the Commission should remove the rate cap in the short-termmarket, which NGSA opposes, it believes all available uncappedpipeline capacity should be competitively auctioned. The auctionshould be mandatory and standardized across all pipelines, theproducer group said. “To optimize the effectiveness of the auction,prearranged capacity-release transactions should be disallowed forperiods of one calendar month or less.”

In AGA’s estimation, however, “an auction would be a step in thewrong direction because it would add costs and constraints to themarket.” Furthermore, it said auctioning of released capacity isn’tnecessary to act as a check against potential abuses of marketpower “because the secondary market in capacity is robustlycompetitive.”

The municipal customers contested the auction mainly because ofits complexity. As an example, they cited the auction proposal ofNatural Gas Pipeline Co., which created a matrix of reserve pricesusing 12 potential time periods and 15 potential markets to definethe range of minimum prices that could apply to any single auction.

“Focusing on this one complexity alone – a matrix of reserveprices that may change from auction to auction – how can theCommission assure shippers, particularly small shippers, that theywill be able to meaningfully understand the information that willbe provided in an auction?” the APGA asked. “The absence of anydescription in the NOPR of how the auction of all short-termcapacity will be conducted underscores the failure of theCommission to come to grips with the complexity of its auctioningproposal.”

The APGA believes that moving away from straight-fixed variable(SFV) rate design would be the closest thing to a cure-all for theindustry. It noted that it “wholeheartedly” endorsed a proposalsubmitted by a coalition of LDCs in February, which called for amandatory shift from SFV for interstate pipelines and the adoptionof a rebuttable presumption whereby 35% of pipeline fixed costswould be recovered through volumetric/commodity rates.

The coalition and APGA believe that a move away from SFV wouldhelp with the turned-back capacity situation, remove the bias infavor of short-term contracts, provide incentives to maximizepipeline throughput, reduce the risks associated with new pipelinecontracts, and limit the potential for stranded costs associatedwith retail unbundling.

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